Market watch: Futures prices drop as traders misjudge petroleum stocks

By the OGJ Online Staff

HOUSTON, Mar. 20 -- Energy futures prices dropped in international markets Tuesday as traders pulled back in anticipation of a run-up in US petroleum inventories after several weeks of declines.

However, the American Petroleum Institute issued a mostly bullish account of US petroleum stocks following the close of trading on the New York Mercantile Exchange.

US gasoline inventories were down 3.8 million bbl to a total of 207.1 million bbl last week, API reported. The inventory of distillate fuel oil, including heating oil, also declined, by 2.9 million bbl to 125.6 million bbl. Jet kerosine stocks were down by 228,000 bbl to 39.5 million bbl. US refineries were operating at 86.2% capacity last week, up from 85% the previous week but down from 91.3% a year ago, said API officials.

The only major inventory increase last week was in US crude stocks, up 2.2 million bbl to 321.7 million bbl.

The decline in petroleum inventory levels is viewed bymany energy futures traders as a clear indicator of a recovering US economy. A rise in inventories might indicate that the recovery is faltering and probably would trigger aggressive selling, analysts said.

The April contract for benchmark light, sweet crudes dropped 23¢ to $24.88/bbl Tuesday on NYMEX, while the May contract was down 16¢ to $25.28/bbl. Following release of the API report, both positions rebounded in after-hours electronic trading, to $25.04/bbl and $25.38/bbl, respectively.

Heating oil for April delivery dipped 0.36¢ to 66.12¢/gal during the regular NYMEX session Tuesday. Unleaded gasoline for the same month lost 0.2¢ to 83.16¢/gal. The April natural gas contract was down 4.9¢ to $3.26/Mcf.

Composite spot natural gas prices have risen more than 40% from a year-to-date low of $1.95/MMbtu in early February, said Robert Morris, energy analyst with Salomon Smith Barney Inc. Spot prices for benchmark US crudes also have increased more than 35% from a year-to-date low of $18/bbl in mid-January.

"The rise in oil prices incorporates a significant 'war premium,' and the surge in natural gas prices has been predominantly technically driven," said Morris in his weekly exploration and production report.

He said, "We believe natural gas prices will pull back over the coming months with storage at record levels for the end of March followed by a relatively strong start to the injection season."

Several exploration and production companies have recently increased near-term hedging positions, while others have indicated that they're considering additional hedges, "reflecting concern that the oil and gas price run-up is unsustainable," said Morris. "Although most have not yet done so, we believe the additional hedging could allow companies either to increase budgets and/or reduce debt."

In London, North Sea Brent prices fell in the International Petroleum Exchange, again on expectations of a more bearish report of US petroleum inventories. The May Brent contract dropped 16¢ to $24.91/bbl. The April natural gas contract dipped 0.4¢ to the equivalent of $2.20/Mcf on the IPE.

However, the average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes jumped by $1.04 to $23.22/bbl Tuesday with reports that Russia will continue to curb its oil exports through June.